BA530 Class 4 Competitive Advantage & Medical Cases John A. Hengeveld
Agenda for Today
Winning Through Innovation Ch 1,2,3,7
The SIMS Online Case
The Emergence of Competitive Advantage How does competitive advantage emerge?
External sources of
Changing customer demand
Internal sources of change Resource heterogeneity among firms means differential impact Some firms faster and more effective in exploiting change Some firms have greater creative and innovative capability
Competitive Advantage from Internally-Generated Change: Strategic Innovation
Characteristics of innovation strategies:
Associated with new entrants to an industry (e.g. Nucor in steel, IKEA in furniture, Enron in e nergy , Home Depot in DIY , Dell in PCs )
Reconcile conflicting performance goals (e.g. Toyota’s lean production system combines low cost, high quality, and flexibility. Richardson Sheffield i n kitchen knives is low cost, innovative and customer responsive.)
Reconfiguring the value chain e.g.---
Nike’s system for manufacturing and distributing shoes totally different from traditional shoe manufacturer
Southwest Airlines simplification of the normal airline value chain
Zara’s system of design, manafacture, and distribution
Competitive Advantage in Different Industry Settings: Trading Markets and Production Markets TRADING MARKETS
None (efficient markets)
Imperfect information availability
Systematic behavioral trends
None Insider trading Cost minimization Superior diagnosis (e.g.... chart analysis) Contrarianism PRODUCTION MARKETS
Barriers to imitation
Barriers to innovation
Identify barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility,barriers to resource replication) & base strategy upon them. Difficult to influence or exploit. MARKET TYPE SOURCE OF IMPERFECTION OF COMPETITION OPPORTUNITY FOR COMPETITIVE ADVANTAGE
Sources of Competitive Advantage COST ADVANTAGE DIFFERENTIATION ADVANTAGE COMPETITIVE ADVANTAGE Similar product at lower cost Price premium from unique product
Features of Cost Leadership and Differentiation Strategies
Generic strategy Key strategy elements Resource & organizational
COST Scale-efficient plants. Access to capital. Process
LEADERSHIP Design for manufacture. engineering skills. Frequent
Control of overheads & reports. Tight cost control.
R&D. Avoidance of Specialization of jobs and
marginal customer functions. Incentives for
accounts. quantitative targets.
DIFFERENTIATION Emphasis on branding Marketing. Product
and brand advertising, engineering. Creativity.
design, service, and Product R&D
quality. Qualitative measurement and incentives. Strong cross-functional coordination.
The Experience Curve The “Law of Experience” The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles. Cost per unit of output (in real $) Cumulative Output 19 94 19 95 19 96 19 97 199 8 199 9 2000
Examples of Experience Curves 100K 200K 500K 1,000K 5 10 50 Accumulated unit production Accumulated unit s (millions) (millions) 1960 Yen 15K 20K 30K Price Index 50 100 200 300 70% slope 75% Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71
The Importance of Market Share If all firms in an industry have the same experience curve, then: relative costs = f (relative market share) This supported by PIMS data: BUT : - Association does not imply causation - Costs of acquiring market share tend to offset the returns to market share ROS (%) -2 0 5 10 0-10 10-20 20-30 30-40 over 40 Market Share (%)
Drivers of Cost Advantage PRODUCTION TECHNIQUES PRODUCT DESIGN INPUT COSTS CAPACITY UTILIZATION MANAGERIAL/ ORGANIZATIONAL EFFICIENCY ECONOMIES OF LEARNING ECONOMIES OF SCALE
Ratio of fixed to variable costs
Costs of installing and closing capacity
Ownership of low-cost inputs
Design for automation
Designs to economize on materials
Mechanization and automation
Efficient utilization of materials
Improved coordination/ organization
Specialization and division of labor
Economies of Scale: The Long-Run Cost Curve for a Plant Units of output per period Minimum Efficient Plant Size Cost per unit of output Sources of scale economies: - technical input/output relationships - indivisibilities - specialization
Scale Economies in Advertising: U.S. Soft Drinks Despite the massive advertising b udgets of brand leaders Co ke and Pepsi, smaller brands which incur the highest advertising costs per unit of sales 10 20 50 100 200 500 1,000 Annual sales volume (millions of cases) Advertising Expenditure ($ per case) 0.02 0.05 0.10 0.15 0.20 Coke Pepsi Seven up Dr. Pepper Sprite Diet Pepsi Tab Fresca Diet Rite Diet 7-Up Schweppes SF Dr. Pepper
Cost Advantage in Short-Haul Passenger Air Transport Costs per Available Seat-Mile (1993) Southwest Airlines United Airlines (cents) (cents) Wages and benefits 2.4 3.5 Fuel and oil 1.1 1.1 Aircraft ownership 0.7 0.8 Aircraft maintenance 0.6 0.3 Commisions on ticket sales 0.5 1.0 Advertising 0.2 0.2 Food and beverage 0.0 0.5 Other 1.7 3.1 Total 7.2 10.5
Key Stages in Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture STAGE 1. IDENTIFY THE PRINCIPLE ACTIVITIES STAGE 2. ALLOCATE TOTAL COSTS PURCH- ASING PARTS INVEN- TORIES R&D DESIGN ENGNRNG COMPONENT MFR ASSEMBLY TESTING, QUALITY CONTROL GOODS INVEN- TORIES SALES & MKITG DISTRI- BUTION DEALER & CUSTOMER SUPPORT
Applying the Value Chain to Cost Analysis (continued) PURCH- ASING PARTS INVEN- TORIES R&D DESIGN ENGNRNG COMPONENT MFR ASSEMBLY TESTING, QUALITY CONTROL GOODS INVEN- TORIES SALES & MKITG DISTRI- BUTION DEALER & CUSTOMER SUPPORT --Plant scale for each -- Level of quality targets -- No. of dealers component -- Frequency of defects -- Sales / dealer -- Process technology -- Level of dealer -- Plant location support -- Run length -- Frequency of defects -- Capaciity utilization under warrenty Prices paid --Size of commitment -- Plant scale --Cyclicality & depend on: --Productivity of -- Flexibility of production predictability of sales -- Order size R&D/design - - No. of models per plant --Customers’ -- Putchases per --No. & frequency of new -- Degree of automation willingness to wait supplier models -- Sales / model -- Bargaining power -- Wage levels -- Supplier location -- Capacity utilization STAGE 3. IDENTIFY COST DRIVERS
Applying the Value Chain to Cost Analysis (continued)
PRCHSNG PARTS R&D COMPONENT ASSMBY TESTING GOODS SALES DSTRBTN DLR
INVNTRS DESIGN MFR QUALITY INV MKTG CTMR
Consolidation of orders to increase discounts, increases inventories Designing different models around common components and platforms reduces manufacturing costs Higher quality parts and materials reduces costs of defects at later stages Higher quality in manufacturing reduces warranty costs STAGE 5. RECCOMENDATIONS FOR COST REDUCTION STAGE 4. IDENTIFY LINKAGES
Dynamic vs. Static Approaches to Manufacturing
Artisan mode: Scientific Management Mode:
- problem solving - quest for “one best way”
- employee knowledge creation - people matched to tasks
- employee control over product - incentives and penalties to
- product and customer ensure conformity to objectives
- product and process innovation- emphasis on product Innovation
- teamwork and cross-functional and big projects collaboration
PRODUCTION SYSTEM MANAGEMENT OF TECHNOLOGY DYNAMIC STATIC
Recent Approaches to Cost Reduction
Dramatic changes in strategy and structure
to adjust to the business conditions of the 1990’s
Delayering and cuts in administrative staff
The fundamental rethinking and radical
redesign of business processes to achieve
dynamic improvements in performance. e.g.:-
Several jobs combined into one
Steps of a process combined in natural order
Minimizing steps, controls, and reconciliation
Use case managers as single points of contact
Hybrid centralization/ decentralization
CORPORATE RESTRUCTURING BUSINESS PROCESS REENGINEERING
The Nature of Differentiation TOTAL CUSTOMER RESPONSIVENESS differentiation not just about the product , it embraces the whole relationship between the supplier and the customer. INTANGIBLE DIFFERENTATION Unobservable and subjective characteristics relating to image, status, exclusively, identity
Observable product characteristics
size, color, materials, etc.
DEFINITION: Providing something unique that is valuable to the buyer beyond simply offering a low price . (M. Porter) THE KEY IS CREATING VALUE FOR THE CUSTOMER
Differentiation and Segmentation
DIFFERENTIATION: is concerned with how a firm competes within
SEGMENTATION: is concerned with where a firm competes
within a market.
Does differentiation imply segmentation?
Not necessarily, depends upon the differentiation strategy:
BROAD SCOPE DIFFERENTIATION: Appealing to what is in common between different customers (McDonalds hamburgers, Honda cars, Sears)
FOCUSED DIFFERENTIATION: Appealing to what distinguishes different customer groups (BMW, Doc Marten footwear)
Differentiation and the Product Life Cycle New packages of hardware and software introduced SYSTEM Augmentation: repackaging of hardware and software PRODUCTS & SERVICES Decommoditization COMMODITY PRODUCTS & SERVICES Commoditization Desystematization: some packages unbundled
Analyzing the Demand Side
Techniques for analyzing product attributes and
Hedonic Price Analysis
Differentiation in Pain Relievers: Multidimensional Scaling of Competing Products in the U.S. High Low Low High EFFECTIVENESS GENTLENESS Tylenol Bufferin Excedrin Bayer Anacin Private label aspirin
Identifying Differentiation Potential: The Demand Side THE PRODUCT THE CUSTOMER What needs does it satisfy? By what criteria do they choose? What motivates them? What are key attributes? Relate patterns of customer preferences to product attributes What price premiums do product attributes command? What are demographic, sociological, psychological correlates of customer behavior?
FORMULATE DIFFERENTIATION STRATEGY
Select product positioning in relation to product attributes
Select target customer group
Ensure customer / product compatibility
Evaluate costs and benefits of differentiation
Differentiation of Hardware and Software SYSTEM PRODUCT SERVICE COMMODITY SUPPORT (SOFTWARE) Differentiated Undifferentiated Differentiated MERCHANDISE (HARDWARE) Undifferentiated
Consistency of Differentiation Strategy: Product Integrity
Key to successful differentiation is consistency of all aspects of the firm’s relationship with its customers.
Product Integrity : the total balance of product features
Internal integrity: consistency between function and structure
External integrity:fit between the product and the customers’ objectives, values, lifestyle etc..
Producer’s strategies High quality Low quality High 7 10 Consumer’s price 7 -5 strategies Low -5 3 price 10 3 Note : In each cell, the lower left number is the payoff to the consumer and the upper right number is the payoff t o the producer. The problem of experience goods : quality can only be ascertained after purchase. Hence: Prisoner’s Dilemma :- Equilibrium reached with consumer paying a low price for a low quality item. If producer can signal quality--- both consumer and producer can move to preferred position: high quality product carrying a high price Problem of Quality in Experience Goods: A “Prisoner’s Dilemma”
Using the Value Chain to Identify Differentiation Potential on the Supply Side FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT INBOUND OPERATIONS OUTBOUND MARKETING SERVICE LOGISTICS LOGISTICS & SALES MIS that supports fast response capabilities Training to support customer service excellence Unique product features. Fast new product development Quality of components & materials Defect free products. Wide variety Fast delivery. Efficient order processing Building brand reputation Customer technical support. Consumer credit. Availability of spares
The Industry Life Cycle
Drivers of industry evolution :
creation and diffusion of knowledge
Introduction Growth Maturity Decline Industry Sales Time
Types of Innovation and Innovation Streams T&O, Winning Through Innovation, figure 7.3 Inexpensive Mechanical Watch Smaller, Thinner Mechanical Watches Swatch Continuous Aim gunfire First Watch Quartz Watch New Existing Markets Incremental Small Extensions of Existing Technology Architectural Reconfigures Existing Technology Discontinuous New operating principles in Core Subsystems&/or Discontinuous Process innovation
Organizational Cycles The success syndrome FIT SUCCESS Size and Age Inertia: Structural Cultural Success in Stable Markets Failure in Market Shifts
Ambidextrous Organizations from WTI, figure 7.6
Provide Clear, Simple Vision
Balance Multiple Architectures
Makes Bets on Shifting Innovation
Large/Small – Incremental/Discontinuous
Culture Promoting Continuous Improvement
Reward Volume & Cost
Culture Promoting Linkage Across Units
Adding and Linking Subsystems
Culture Promoting Breakthroughs
Many Small Failures
Learn by Doing
Reward Experimentation and Innovation
Technology Cycles Rate of Innovation Time Product innovation Process Innovation Substitution Event DD DD
Examples of Technology Cycles
Audio Recording and Distribution
Standardization of Product Features in Autos FEATURE INTRODUCTION GENERAL ADOPTION Speedometer 1901 by Oldsmobile Circa 1915 Automatic transmission 1st installed 1904 Introduced by Packard as an option, 1938. Standard on Cadillacs early 1950s Electric headlamps GM introduces , 1908 Standard equipment by 1916 All-steel body GM a dopte s 1912 S tandard by early 1920s All-steel enclosed body Dodge, 1923 Becomes standard late 1920s Radio Optional extra 1923 Standard equipment, 1946 Four-wheel drive Appeared 1924 Only limited availability by 1994 Hydraulic brakes Introduced 1924 Became standard 1939 Shatterproof glass 1st used 1927 Standard features in Fords 1938 Power steering Introduced 1952 S tandard equipment by 1969 Antilock brakes Introduced 1972 Standard on GM cars in 1991 Air bags GM i ntroduce s, 1974 By 1994 most new cars equipped with air bags
How Typical is the Life Cycle Pattern?
Technology-intensive industries (e.g. pharmaceuticals, semiconductors, computers) may retain features of emerging industries.
Other industries (especially those providing basic necessities, e.g. food processing, construction, apparel) reach maturity, but not decline.
Industries may experience life cycle regeneration.
1900 ‘50 ‘60 ‘90 1930 50 60 90
Life cycle model can help us to anticipate industry evolution — but dangerous to assume any common, pre-determined pattern of industy development.
Color B&W Portable HDTV ?
Evolution of Industry Structure over the Life Cycle
INTRODUCTION GROWTH MATURITY DECLINE
DEMAND Affluent buyers Increasing Mass market Knowledgeable,
penetration replacement customers, resi-
demand dual segments
TECHNOLOGY Rapid product Product and Incremental Well-diffused
innovation process innovation innovation technology
KSFs Product innovation Process techno- Cost efficiency Overhead red- logy. Design for uction, ration- alization, low
The Driving Forces of Industry Evolution Customers become more knowledgeable & experienced Diffusion of technology Demand growth slows as market saturation approaches Customers become more price conscious Products become more standardized Distribution channels consolidate Production shifts to low-wage countries Price competition intensifies Bargaining powe r of distributors increase s BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION Excess capacity increases Production becomes less R&D & skill-intensive Quest for new sources of differentiation
ROI at Different Stages of the Industry Life Cycle
Note: The figure shows standardized means for each variable for businesses at each stage of the life cycle . Strategy and Performance at across the Industry Life Cycle
Preparing for the Future : The Role of Scenario Analysis in Adapting to Industry Change
Stages in undertaking multiple Scenario Analysis:
Identify major forces driving industry change
Predict possible impacts of each force on the industry environment
Identify interactions between different external forces
Among range of outcomes, identify 2-4 most likely/ most interesting scenarios : configurations of changeforces and outcomes
Consider implications of each scenario for the company
Identify key signposts pointing toward the emergence of each scenario
Prepare contingency plan
1880s 1920s 1960s 2000 Mail order, catalogue retailing e.g. Sears Roebuck Chain Stores e.g. A&P Discount Stores e.g. K-Mart Wal-Mart “ Category Killers” e.g. Toys-R-Us, Home Depot Internet Retailers e.g. Amazon; Webvan Warehouse Clubs e.g. Price Club Sam’s Club Innovation & R enewal over the I ndustry L ife C ycle : R etailing
See Insert posted tomorrow
The SIMS Case
What accounts for The Sims being the best selling PC game? Why has enthusiasm lasted so long?
What marketing plan should the Sims pursue?
EA is the worlds largest game publisher. It supports a wide variety of games across many platforms. Is such a diversified strategy risky? What are the long term consequences?
Does it make sense for such a large investment in EA.com?
Who poses the greatest competitive threat to EA? What do we expect from this market over time?
What I expect from THE SIMS
Develop a marketing strategy from 5C-4P’s
Don’t miss the segmentation step!!
Analyze EA’s strategy and organizational structure. How is the game industry different from… say … Dell or Sunrise?
Use methods from Grant to analyze competition, assess resources and capabilities esp wrt EA.com and TSO
Figure out what to do with the key strategic decisions on TSO
Marketing Analysis (The 5Cs) Market Segmentation Target Market Selection Product/Service Positioning Marketing Mix (The 4P’s) Product & Service Place/ Channel Promotion Pricing Customer Acquisition Customer Retention Creating Value Capturing Value Sustaining Value Customers Company Competitors Collaborators Context
Tool walk through – IKEA
Porter 5 Forces and Competitive Analysis in Europe prior to IKEA entry
“ Industry Value Chain” prior to IKEA entering
5Cs and 4P’s for how IKEA including Market Segmentation Analysis in Europe
Resources/Capabilities Analysis for IKEA to enter in the US with its Europe Concept
Congruence Analysis for Store Startup and for Geographic Management
As a group we will derive: 5Cs and 4Ps for how IKEA might operate in US (including Market Segmentation Analysis)